Since I last wrote about Facebook Inc (NASDAQ: FB) in A Portmanteau Argument for Facebook on March 17, 2021, the Communication Services Select Sector SPDR® Fund participant has hit a trillion dollars in Market Capitalization, breaking this barrier in less time than it took for fellow trillionaires like Apple Inc (NASDAQ: AAPL), Microsoft Corp (NASDAQ: MSFT), Google’s parent company, Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL), and Amazon.com Inc (NASDAQ: AMZN) . It is challenging to keep track of all the legal challenges Facebook engages in. Still, the recent dismissal of the antitrust case provides an exciting narrative where legal proceedings have unphased the stock price.
Facebook comprises 22.89% of the Communication Services Select Sector SPDR® Fund but has delivered almost three times the performance of the Exchange Traded Fund since March 17, 2021, when I first wrote about Facebook. Alphabet Inc has both its voting and non-voting shares included in the Exchange Traded Fund.
Combined, they compose 23.24% of the Communication Services Select Sector SPDR® Fund holdings, and much like Facebook Inc (NASDAQ: FB), they each have outperformed the Exchange Traded Fund. A possible reason could be the increased advertising revenues due to a change in the traditional means of distribution, acquisition, and measurement. With an expense ratio of 0.12%, a total of 26 components make up the Communication Services Select Sector SPDR® Fund. Therefore, I was curious to see which members performed since March 17, 2021, and for the year since the broader ETF has returned approximately 23%. The following tables is a compilation of those findings.
|S&P Comm Services XLC Performers and Laggards since March 17 2021|
|S&P Comm Services XLC Performers and Laggards YTD 2021|
|Data compiled using Google Finance and Google Sheets. Data is compiled for informational purposes only as mentioned by Google Finance, “Quotes are not sourced from all markets and may be delayed up to 20 minutes. Information is provided ‘as is’ and solely for informational purposes, not for trading purposes or advice”|
Even though Facebook has outperformed the broader ETF since March 17, 2021, Alphabet has been the outperformer for the year. Moreover, since March 17, Discovery Inc (NASDAQ: DISCK) (NASDAQ: DISCA), Viacomcbs Inc (NASDAQ: VIAC), and Fox Corp (NASDAQ: FOX) (NASDAQ: FOXA) registered double-digit declines, with Discovery and Viacom recording 50% individually. Since the start of 2021, Take-two Interactive Software Inc (NASDAQ: TTWO) has been the underperformer within the XLC Exchange Traded Fund.
On June 28, Michael Balsamo and Marcy Gordon of AP News reported that Judge dismisses gov’t antitrust lawsuits against Facebook, stating that “U.S. District Judge James Boasberg ruled Monday that the lawsuits were “legally insufficient” and didn’t provide enough evidence to prove that Facebook was a monopoly. The ruling dismisses the complaint but not the case, meaning the FTC could refile another complaint.” In their reporting, they shared comments from Richard Hamilton Jr., a former prosecutor, and Justice Department antitrust attorney who “noted that as Boasberg saw it, the FTC failed to demonstrate how it arrived at the claim that Facebook controls 60% of the market in social networking and how that market power is measured.” Facebook is engaged in interesting legislative and legal problems, not just domestically but across the world. In a childish way to look at a complex societal problem, it is worth referring to the classic rabbit and tortoise race tale for its simplicity in applying the dynamic at play.
The zeitgeist is filled with commentary regarding how these “trillion-dollar companies,” specifically Facebook and its other platforms Whatsapp and Instagram, should be broken up to decrease the company’s monopoly status. However, the recent ruling from the U.S. District Judge James Boasberg displayed that defining Facebook as a monopoly would be difficult due to a lack of definition in the way of measurement. Therein lies my tortoise and rabbit comparison. Facebook is the rabbit leading the way in this race, creating paradigms that are difficult to comprehend and resolve, with anti-trust laws from yesteryear being applied to modern dynamics by a tortoise in the form of the Federal Trade Commission. Facebook, as a company, has prodigious amounts of scrutiny bestowed on it every day due to its Growth-At-All-Costs Mentality. Nevertheless, it is worth noting that the FTC legal proceedings did not stop the company from reaching the exclusive trillion-dollar market cap.
In 2019, the Federal Trade Commission imposed a $5 Billion Penalty and Sweeping New Privacy Restrictions, with it being “one of the largest penalties ever assessed by the U.S. government for any violation.” Fast-forward to June 4, 2021, and the European Commission opens an investigation into the possible anticompetitive conduct of Facebook. It is fair to say that such inquiries from large, meaningful societal entities should impact its stock price. In fact, since June 2019, the stock has outperformed both the Standard and Poor’s 500 Index and Communication Services Select Sector SPDR® Fund.
On June 11, 2021, Mr. Cicilline of Rhode Island, Mr. Gooden of Texas, Mr. Nadler of New York, and Mr. Buck of Colorado introduced H.R. 3816, “The American Choice and Innovation Act,” which provides an acute paradigm to ponder. Under Section 2. Lawful Discriminatory Conduct, (3) states that use of “non-public data obtained from or generated on the platform by the activities of a business user or its customers that is generated through an interaction with the business user’s products or services to offer or support the offering of the covered platform operator’s own products or services” . Juxtapose that language to a statement from Facebook’s Q1 21 10-Q where the company states that, “Actions by governments that restrict access to Facebook or our other products in their countries, or that otherwise impair our ability to sell advertising in their countries, could substantially harm our business and financial results” . Such targeted language could pose an impact on Facebook since Facebook generates most of its revenue from advertising.
Consider this, compared to Q1 20, the company’s advertising revenues grew 45.87% in Q1 21 to $25.44 billion. Much like advertising is a significant source of income for the TV stations, advertising revenues for Facebook Inc (NASDAQ: FB) made up 97.20% of total revenues in Q1 21.
The upcoming summer reopenings and Back-To-School/College/Work season should provide a good lift for Facebook’s advertising revenues since the platform offers access to 1.88 billion daily active users, according to their Q1 21 10-Q. Facebook gives businesses an agile, more effective way to reach audiences who have grown into smartphones. According to the Pew Research Center, “The share of Americans that own a smartphone is now 85%, up from just 35% in Pew Research Center’s first survey of smartphone ownership conducted in 2011” .
Juxtapose that to data from the American Time Use Survey (ATUS) provided by the Bureau of Labor Statistics suggesting a decline in Percent of the population aged 15 and over engaged in Watching TV, from 81.8% in 2009 to 77.9% in 2019; and the Pew Research Center mentioning that “the share of Americans who say they watch television via cable or satellite has plunged from 76% in 2015 to 56% this year” . Much like banks and shopping, platforms with digital advertising capabilities will translate to dollars.
|Year||Estimate Percent participating on an avg day – Watching TV|
|Data from the Bureau of Labor Statistics American Time Use Survey. Click here to access the survey database.|
We are on our smartphones more than our Televisions. Services such as Netflix allow for ignoring advertisements entirely, forcing businesses to adapt to digital advertising to promote their goods and services. Suppose the company continues to execute and deliver on advertising revenues; it is worth pondering just how far this newly minted, young, trillion-dollar growth at all costs company will grow to.